The ABCs of the Electric Utility Industry.

• Author: Johnson, Scott D.

As it is slowly deregulated, the electric utility industry will have to reengineer and adopt ABC/ARM accounting techniques to determine the real value of businesses.

"You mean I won't have to buy from the local utility?" That is the reaction many people express when they learn that consumers soon will have options to choose between energy service providers. The gas and electric utility industry is undergoing radical change worldwide similar to the restructuring and deregulation of the telecommunications and other monopoly industries. Bulk power consumers already have a number of energy supplier choices, and their options continue to grow, and even residential customers will have supplier options in a number of states including California.

Early this century, social policy dictated that consumers benefited most from receiving energy services from a monopoly provider in a designated franchise area. But today, the driver behind utility restructuring and deregulation is the consumer who demands specialized services, greater supplier choices, and lower costs.

As the vertically integrated industry is pieced apart, with processes performed by both utility and nonutility participants, investors, managers are trying to figure out what parts of this entire process--from energy production to end-user delivery--generate the value. Unfortunately, utility cost accounting practices do little to help answer this question. Utility accounting equates spending and revenues only at the corporate, not operating, level and accumulates large overheads in relation to direct costs.

Consequently, utility cost accounting must be reengineered in an activity-based approach in order to understand the basis for value in the new restructured energy industry. This reorganization will facilitate control of overhead, determination of the costs of utility services, comparison of revenues and costs for profitability analysis, and strategic planning for positioning the utility for the future.

Deregulating the Utility Industry

Currently, most utility customers buy gas and electricity on a "bundled" basis. Utilities provide a package of services that includes the generation, transmission, and distribution of the commodity and a variety of energy management services for the customer. Restructuring separates these services as illustrated in Exhibit 1.

When the future structure of the industry becomes a reality, the consumer likely will have a variety of options. The consumer may continue to buy "bundled" energy services from the distribution utility, relying on the utility to perform all the activities required to procure and deliver energy and provide service, or the customer may opt to use the utility only for energy delivery and instead procure power and services through energy brokers and other suppliers. In this case, power and gas likely will be transmitted through a nonutility exchange and network system operation directly to the wholesale customer or to the utility network for further distribution to the retail customer. More imaginative scenarios even suggest that consumers need not conduct business with a private utility or municipality at all to the extent that distribution service is instead...